Saturday 10 February 2018

When in a hole you MUST stop digging - when insolvency strikes

As business owners we are invariably optimists. Things will get better. Work a bit harder. Tweak a few things.

But what if the business is insolvent?

This can creep up on a business. One or two unprofitable projects, a significant bad debt perhaps and all of a sudden cashflow is extremely tight. The definition of insolvency is a business not being able to meet its payment obligations to creditors when they fall due. This is not a short term cashflow blip, but something more systemic. On the balance sheet liabilities will exceed assets. Of greater concern is when short term liabilities - bank overdraft, tax due and payments due to suppliers exceed cash and payments due from customers.

In this situation the directors of the business have legal obligations. They can't just keep calm and carry on. Choosing to pay some creditors in preference to others when the business is insolvent is a legal offence and the directors could be held personally liable if the business fails.

The choices for the directors are:

1. Contact all creditors and see if you can reach an informal agreement

It is recommended that a financial projection is prepared in advance of any discussions with creditors so that there is a realistic view of what is affordable. A turnaround plan may involve deferring payments on 'old' debt whilst keeping up to date with new obligations. It is critical that the plan shows that the business is profitable going forward. This is likely to require significant cost cutting and restructuring

2. A Company Voluntary Arrangement

This is where an Insolvency Practitioner is engaged to make binding arrangements with creditors. Unlike the informal arrangements at 1 above, this is a formal arrangement the creditors must adhere to. The company can continue to trade during the CVA

3. Administration

Again this is a formal arrangement where respite can be gained from creditors and the company can continue to trade. Property may need to be sold to cover debts

The final option is liquidation where the company is wound up and any assets are sold and distributed to creditors

So when the company is insolvent, carrying on as normal is not an option. The choices listed above must be followed or the directors will be open to the charge that they treated some creditors more favourably than others

With speed and resolve, following option 1 can turn a company round and bring it back to stability. If action is taken too late, it is more likely that the business will fail and liquidation becomes the only option.

If you think your business may be insolvent I would recommend an urgent discussion with your company accountant.

www.base52.co.uk/services/consultancy

Saturday 3 February 2018

How do you know if your business is in a turnaround situation...and what should you do about it?

Business can be tough. Some business owners dig in when times get hard. They work longer hours, get more stressed, do more of the things they have always done. But sometimes that isn't enough. The business keeps trading unprofitably, suppliers demand payment and the business finances get worse.

Spotting the signs of a struggling business early enough can make the difference between survival and failure.

What is needed is a radical review or 'turnaround plan'. My own professional body, The Chartered Institute of Management Accountants describes this as 'a set of actions required to save an organisation from business failure and return it to operational normality and financial solvency'

There are 6 stages in a turnaround situation:

  • Management accept the need for change
  • Carry out a business review and identify underlying problems
  • Prepare a recovery plan
  • Implement the plan
  • Stabilise the business
  • Embed the change

Often an external consultant or turnaround specialist can help senior management make the challenging decisions which will be needed. There is a an Institute for Turnaround which recognises the specialist nature of the skills required to deliver this kind of work. Finance professionals also have a key role in supporting a turnaround - reporting on the financial status of the business and the areas of poor performance and setting up reporting systems to track improvements. Good financial forecasting models are also essential.

I have been involved in several turnarounds in my role as an external accountant, usually working alongside a turnaround specialist and the business owner. The most successful outcomes have been where the business owner has accepted the need for change at an early stage and put their full weight behind a turnaround plan. The few instances where management have just carried on doing the same thing and hoping for the best have inevitably not ended well

The tell tale signs of a business which might need a 'turnaround' remedy are:

1. Shortage of cash
2. Pressure from suppliers for faster payments
3. Showing continued losses in monthly or quarterly accounts

If your business is in this position taking urgent and radical action is probably required. If you would like an informal discussion to see how we can help please get in touch using the link below

www.base52.co.uk/services/consultancy